My take was the FOMC meeting certainly had a bearish lean – with rates now currently sitting at 5% – markets have priced in 1 further 25bps hike in May to take the rate to 5.25% – looking at the terminal rate projections show a median of 5.1%, central band of 5.1 – 5.4%. but markets do not currently see the “higher for longer narrative playing out”
Comments from Powell:
The banking crisis will likely result in credit tightening which will act as a proxy for additional rate hikes by limiting credit and therefore cooling demand.
During the press conference he moved towards a much more dovish “some additional policy firming may be appropriate” but then reiterated this during the press conference – when questioned about further rate hikes he responded to a question by saying “I would focus on the we may or it may be appropriate to hike more”
He also mentioned that there was a consideration to pause at this meeting but they felt 25bps was appropriate.
Things I’m watching
With the next meeting in May there is a lot of data between now and then; my early thoughts on what I’m going to be looking for are:
- General Inflation data
March 31 – Core PCE Price Index m/m
April 12 – CPI
April 13 – PPI
- A slowdown in credit, both on commercial and business would signal that the banking crisis has acted as a proxy rate hike meaning no need for a fed hike.
April 7 – Consumer Credit m/m
- A slowdown in spending
March 31 – personal spending
April 3 – Construction Spending m/m
These are all hard data releases as opposed to soft data (like the surveys). The soft data is still important but really the hard data is the definitive figures that the Fed will be wanting to base their next decision on. If these show a cooling then the end of the hiking cycle may be here and this is a pause.
Cuts?
This is where the market and the fed show a little bit of divergence with some analysts suggesting up to 200bps of cuts BEFORE 2024 – now this was based on further deterioration of the banking crisis but a lot of analysts are suggesting that there may be no pause and the Fed may straight into a cutting cycle.
Powell said this is not the base case – and reiterated his intention to bring inflation under control and down to 2% over the long run. The projections do show ~100bps cut in 2024. He also acknowledged that bringing inflation down to 2% would see softening in the unemployment rate and growth – this could be perceived that he is willing to tolerate that to reach the 2%.
My view
If the market is wanting to price in cuts which will drive the dollar lower I don’t want to be caught on the other side but at the same time I don’t want to fight the Fed.
The next FOMC meeting in May and the first dovish statement from Powell is still fresh, I will have a short term bearish outlook for the dollar and begin looking for setups to short but being wary of holding any trades around the releases I mentioned above. There are a few other central banks who may be close to cutting or pausing too, so work will need to be done to identify a good partner – potentially CHF, AUD or maybe even the Euro.
A worsening of the banking issues will also strengthen my bearish views on the dollar.
So if there is a banking issue – I’d likely favour a safe haven like the CHF (even though they are heavily involved in banking I don’t see this impacting them as much on a global stage). The Euro may also work for this scenario. Also potentially – if the BoJ come out with something a bit hawkish this could also work.
If there is no banking crisis and the cuts move towards a more risk on AND China picks up, then the AUDUSD might be a good bet.
Kind regards,
James
